Interest Rate remains, but so does the Downgrade Risk for SA’s Zero Growth Economy

Recent global events such as BREXIT (see Into SA eBRIEF July 2016) and the terror attacks in Europe and Turkey have triggered uncertainty in markets world-wide and as a result the South African Reserve Bank (SARB) has taken a cautious stance and revised the GDP growth forecast for South Africa down to 0%. At the same time last week its Monetary Policy Committee (MPC) decided almost unanimously on leaving the Repo-Rate (interest rate for which commercial banks borrow from SARB) unchanged at 7.0%, which translates to a Prime Lending Rate of 10.50% charged by the Commercial Banking Mafia.

This decision did not come as a surprise as the feeling amongst analysts was only 10% in favour of a rate hike in light of the recent rise in Consumer Inflation to a 6.3% and therefore outside the government bandwidth between 3% and 6%.

“The South African economy is undergoing a protracted period of weak growth. This is partly due to exceptionally weak growth in domestic spending that is likely to continue because of ongoing government belt-tightening, low growth in credit extension to households, low consumer confidence and the impact of previous interest hikes,” said FNB chief economist Sizwe Nxedlana in a statement. “It is not as if South Africa will be going into a recession,” said Kevin Lings, chief economist at Standard Banl’s Stanlib. “Some sectors such as mining and manufacturing showed positive signs. The country has implemented a new building programme for electricity and export trade is gaining traction. Some commodity prices such as coal and iron ore have shown improvements too. The agricultural environment is also expected to get better, following the drought”, he said.

h3. BREXIT Consequences

“The global economic outlook has been influenced by the outcome of the UK referendum. The financial markets displayed a high degree of volatility in the immediate aftermath of the outcome, but have stabilised to some extent since then,” said SARB governor Lesetja Kganyago at the rates announcement. Since the referendum, global growth forecasts have generally been revised down. “Global uncertainties have delayed monetary policy tightening in advanced economies”, said Kganyago. “The uncertainty drives investment out of emerging markets and towards safe havens,” said Lings. These include gold and US government bonds. The reserve bank will most likely review the long-term implications of BREXIT. For now SARB should take a “wait and see” approach and make judgements based on developments, he added.

“The uncertainty is not good, it impacts growth and investments,” added Lesiba Mothata, chief economist at Investment Solutions. Following BREXIT, negotiations could take up to three years and this will impact GDP outcomes and eventually impact emerging markets like South Africa. Mothata is here in essence right, but forgets that so far the referendum and its results are still a national result, without any legal cross-border consequences as long as the newly appointed Prime Minister does not sign off the Exit-Declaration in terms of Article 50, which is the formal notification Britain must give to the European Union to declare its intention to withdraw from the block and has been widely perceived as an irreversible process, which gives the departing state two years to exit.

And even further: The British government could decide against pursuing BREXIT even after Article 50 has been invoked, a senior legal figure has said, representing a group of lawyers who have studied the law around Article 50 and now claimed BREXIT may not be irrevocable after all after it is triggered, which the experts argue could give the UK more leverage in exit negotiations.

h3. Interest Rate Outlook

SARB has not ruled out the potential for further interest rate tightening, stated Sanisha Packirisamy, economist at Momentum Investments. SARB remains mindful of the second-round impact of inflation expectations and an inflation outlook, which continues to be on the upside. Nomura SA believes SARB won’t be cutting rates anytime soon. As a result, their projection for the rates was adjusted from 7.75% in November to 8% in January. “Overall, we think this forecast reflects well the MPC framework of not wanting to cut, delaying hiking where possible, but still reaching neutral rates, and the fear of short-run positives quickly reversing,” stated emerging markets economist Peter Attard Montalto of Nomura.

h3. Credit Rating Outlook

“The risk of a credit downgrade is still real,” said Lings. Ratings agencies S&P and Finch flagged growth as a significant concern when they decided to keep South Africa a notch above junk status earlier this year. However, the agency acknowledged that the weak growth in South Africa is a (partial) result of an overall weaker global economic environment. “The global economic outlook also influences ratings,” said Mothata. This could help South Africa in that the international rating agencies could postpone their decision into early next year.

S&P is focusing on whether the country will implement policies that will lead to growth – so far there have been none, said Lings. Since taking the role as finance minister in December last year, Pravin Gordhan’s main focus was on stabilising the budget and private public partnership development. This is not enough to guarantee growth, said Lings. “Government needs to follow up with the implementation of policy that will stimulate growth. That is critical.”

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